The Fuse: Our Top Ten Stories of 2015

We launched The Fuse just over six months ago, in June 2015 at OPEC’s International Seminar. Our goal has been to increase understanding of global oil markets, alternative transportation, and the geopolitics of energy, and stir thoughtful debate on these critical issues. Since then, we’ve published over 300 stories, infographics, and videos, commenting on global energy markets as they proceed further into uncharted territory. While we take pride in all of our content, below are ten standout pieces. Please enjoy, and thank you for reading The Fuse.

Reed’s series on ISIS and oil was one of our most popular content streams of the year—with good reason. Reed’s thoughtful analysis examines many sides of ISIS’s oil production and consumption that was glossed over by many media outlets, unearthing evidence that the group’s oil production actually increased in spite of coalition airstrikes in 2015, and illustrating the fact that impoverished locals were processing ISIS oil in makeshift refineries. The piece is a must-read for anyone seeking to understand exactly how oil production and transportation is funding the terrorist group.

Key Excerpt: Not enough attention has been paid to consumption dynamics within ISIS territory. If ISIS is producing 50,000 b/d right now, which seems very possible, then all of its oil production could conceivably be sold to local refiners. The capacity is there and so is the demand: Some five million people trapped inside ISIS territory can consume that much or more. In a perfect world—one without ISIS—local demand would be twice what ISIS produced last summer and maybe three times what it’s producing now. ISIS-controlled Raqqa in Syria and Mosul in Iraq are major population centers that need fuel. Of course, the ISIS war machine also needs refueling.

Often, in the day-to-day of covering developments in the energy industry and international relations, it can be easy to forget the true human costs of reliance on energy that is sourced from some of the world’s least democratic nations. In a jarring op-ed, Garry Kasparov, the Russian political activist and chess grandmaster, lays out the deeply unsettling ways that decades of bloated oil revenues have enabled the world’s “petro-dictatorships,” and why the Western world should sever itself from dependence on energy resources from such countries.

It has long been said, accurately, that energy policy is security policy. That is truer than ever today and in a very literal way as violence erupts with several of the world’s largest energy producers at its center.

Key Excerpt: Putin is more afraid of fracking than he is of any sanction or NATO action. (That the Kremlin creates and sponsors puppet anti-fracking groups around the world confirms this theory.) If the price of oil stays too low for too long, Putin’s regime will no longer be able to keep up its end of its deal with the Russia people, that it would provide economic stability in exchange for their freedom. As long as the Russian treasury is full of oil profits, the Putin regime has no need of its people, no need for them to be well-educated or to start new businesses. The same is true of every other petro-dictatorship.

It has long been said, accurately, that energy policy is security policy. That is truer than ever today and in a very literal way as violence erupts with several of the world’s largest energy producers at its center. Greater energy independence for Europe and America—whether it comes from increased fossil production, nuclear, or green tech innovation—is not only crucial for geopolitical balance, but a crucial tool for human rights and democratic reforms worldwide.

With China now as influential a player in global oil markets as the United States, many questions remain on how the rising superpower will wield its growing clout. One critical development—its pending launch of a yuan-denominated crude oil benchmark—provides a clue that China will continue to expand its reach, and it sees its influence in energy systems as a way to bolster the power of its currency. Piotrowski further explores this important dynamic in two additional pieces, discussing how China’s currency will challenge the dollar, and how the IMF’s recent decision to include the yuan as a reserve currency will bolster China’s effort in launching the new crude futures benchmark early next year.

The Chinese benchmark will prove a net positive for the oil trading world, but its success will take time to develop.

Key Excerpt: The new Chinese contract will be denominated in yuan, part of an effort to strengthen it as a global currency and challenge the U.S. dollar’s supremacy. This provides a host of opportunities and risks. The benchmark will prove a net positive for the oil trading world, but its success will take time to develop: China needs to attract a wide variety of investors who may be skeptical of oil being traded in a non-dollar currency and the market power of state players. The move is the latest example of Chinese financial institutions further expanding into the global economy as the government attempts to open its markets to outside players.

Not everyone was surprised with the outcome of the November 2014 OPEC meeting, when the group’s production target remained unchanged at 30 million barrels per day despite falling prices. Bob McNally, former White House official and founder of energy consultancy The Rapidan Group was among the first to correctly predict the fact that Saudi Arabia would not act as the swing producer. In an exclusive interview, McNally shares insight on the dramatic ways the oil market has evolved over the past decade, and why we are likely to be entering an era of heightened oil price volatility.

Key Excerpt: For industry, governments, and consumers living in the day-to-day, oil price gyrations arising from supply-demand imbalances and the absence of a swing producer are likely to be jarring and unsettling. It makes planning nearly impossible for all the industries and government agencies that are exposed to oil prices, from car makers to Pentagon planners and central bankers.

We are likely to become reacquainted with the downsides of not having a supply manager for a commodity that is a critical input for industrial production, consumption, and defense, and yet is prone to violent instability that shale will mitigate but not suppress.

Given the market tumult of the past year, many have been quick to declare the death of OPEC. Piotrowski points to the fact that this is not the first time in recent history that observers have declared OPEC powerless and irrelevant, only to see dramatic reversals years later. Instead, this piece explains how OPEC’s power is cyclical depending on its market share, which grows during times of low oil prices.

Key Excerpt: There was also a lot of talk during the price rise from 2004-8 that the cartel had lost control of the market. Even OPEC ministers admitted the group was powerless to arrest the rapid rise in prices amid its low spare production capacity. But once prices crashed in the wake of the financial collapse, OPEC members came together quickly to cut by a total of 4.2 mbd to keep further losses from occurring and support the market. The action worked well. Although Brent fell to $40 in January 2009 soon after the group announced its decision to throttle back, the oil price reached $80 a year later and then hit triple digits at the beginning of 2011. Recovering demand after the 2008 financial crisis helped lift the market, as did the beginning of the Arab Spring in 2011, but if OPEC had not agreed to cut output, the market would not have rallied as fiercely as it did.

In a page-turning biography, Bloomberg BusinessWeek reporter Ashlee Vance presented a compelling case that Elon Musk’s business ventures are far more than your typical Silicon Valley startups—they are, to borrow a phrase, helping to make America great again. In an exclusive interview, Vance discussed his experiences writing the book, Musk’s reaction to his work, and the emails he received from inspired readers who were scrapping their MBA programs to become mechanical engineers and participate in an exciting new era of American innovation.

Key Excerpt: There is this whole mentality that we can’t make things in America anymore, that it’s too expensive. And yet SpaceX has its factory in the middle of Los Angeles, and Tesla has its factory on the outskirts of Silicon Valley, two of the most expensive places in the world. Even if Tesla doesn’t become an auto company the size of BMW, they have pushed the industry forward as a whole. Not just in terms of the cars, but also the software, which is just as big a deal as the electric drivetrain. I think Elon Musk has definitely shown that it can be done, that these staid industries can be revamped, and that this can play into all of the U.S.’s strengths.

Volkswagen’s machinations to fool U.S. environmental regulators is still making headlines. There’s a great deal to consider, given the sophistication and longevity of this corporate scandal, but one of the most important implications is how the fallout has changed consumer perceptions of clean diesel technology, pushing some toward hydrogen and electric vehicles. VW is now claiming that it is doubling down on plug-in vehicles, following many years of active disinformation efforts on the company’s part, and pushing for government incentives to bolster sales of its diesel cars.

Volkswagon was hypocritical in its public relations: The company actively criticized the U.S. government for “unfairly” supporting electric vehicle technology, and published op-eds about how VW and Audi’s advanced diesel engines made diesel the clean fuel of the future.

Key Excerpt: Volkswagen, with its defeat device, is not an isolated incident in terms of automotive industry scandals. GM’s faulty ignition switches, Toyota’s runaway accelerators, Takata’s exploding airbag and Firestone’s flimsy tires are just the most recent of countless instances where automakers knew there was a problem with their product and didn’t take proactive measures to mitigate the damage. Volkswagen’s case is different because of the intentionality of its deception—rather than discovering that its product was faulty and covering it up after it was on the market, the company purposefully designed an algorithm that could cheat the system. It was also hypocritical in its public relations: The company actively criticized the U.S. government for “unfairly” supporting electric vehicle technology, while pushing incentives for diesels, and published op-eds about how VW and Audi’s advanced diesel engines made diesel the clean fuel of the future.

Where do each of the presidential candidates stand on energy issues? How has energy been discussed (or not discussed) during the debates? How do the public statements of candidates align with their previous actions on energy? Which energy topics are being missed, and how factual is the conversation? Our election tracker has covered these topics, and will continue to keep tabs on developments as the election heats up in 2016.

Low energy prices have inflicted no shortage of collateral damage around the world, and U.S. shale gas producers number among the victims. But while the collapse in natural gas prices is impairing drillers, Cunningham outlines the many structural factors that work to the industry’s favor in the long term, many of which also apply to shale oil production.

Natural gas producers could be rescued by new pockets of demand.

Key Excerpt: Natural gas producers could be rescued by new pockets of demand, however. Cheap gas has sparked a flood of investment in petrochemicals, a major source of demand for natural gas. According to the American Chemistry Council, there are an estimated 226 petrochemical projects related to shale gas currently underway, accounting for at least $138 billion in capital investment. As new facilities producing plastics, fertilizers, and other industrial products come online, more natural gas will be consumed. The EIA projects that natural gas consumption in the industrial sector will rise by 6.4 percent in 2016 as a backlog of petrochemical and industrial projects are completed.

In our first breaking news story, we conducted a brief stand-up interview with Indonesia’s energy minister at OPEC’s International Seminar in June 2015. He informed us that the country would rejoin the cartel not as an observer—as was previously understood by market watchers—but as a full member. The news media quickly began covering this development, which was made official at the recent December meeting. To our knowledge, this was the first official documentation of the development, which has raised a great deal of speculation about how and why a net oil importing country would rejoin The Organization of the Oil Exporting Countries.

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The Fuse is an energy news and analysis site supported by Securing America’s Future Energy. The views expressed here are those of individual contributors and do not necessarily represent the views of the organization.

Issues in Focus

Safety Standards for Crude-By-Rail Shipments

A series of accidents in North America in recent years have raised concerns regarding rail shipments of crude oil. Fatal accidents in Lynchburg, Virginia, Lac-Megantic, Quebec, Fayette County, West Virginia, and (most recently) Culbertson, Montana have prompted public outcry and regulatory scrutiny.

2014 saw an all-time record of 144 oil train incidents in the U.S.—up from just one in 2009—causing a total of more than $7 million in damage.

The spate of crude-by-rail accidents has emerged from the confluence of three factors. First is the massive increase in oil movements by rail, which has increased more than three-fold since 2010. Second is the inadequate safety features of DOT-111 cars, particularly those constructed prior to 2011, which account for roughly 70 percent of tank cars on U.S. railroads. Third is the high volatility of oil produced from the Bakken and other shale formations, which makes this crude more prone towards combustion.

Of these three, rail car safety standards is the factor over which regulators can exert the most control. After months of regulatory review, on May 1, 2015, the White House and the Department of Transportation unveiled the new safety standards. The announcement also coincided with new tank car standards in Canada—a critical move, since many crude by rail shipments cross the U.S.-Canadian border. In the words DOT, the new rule:

Since the rule was announced, Republicans in Congress sought to roll back the provision calling for an advanced breaking system, following concerns from the rail industry that such an upgrade would be unnecessary and could cost billions of dollars. The advanced braking systems are required to be in place by 2021.

Democrats in Congress have argued that the new rules are insufficient to mitigate the danger. Senator Maria Cantwell (D-WA) and Senator Tammy Baldwin (D-WI) both issued statements arguing that the rules were insufficient and the timelines for safety improvements were too long.

The current industry standard car, the CPC-1232, came into usage in October 2011. These cars have half inch thick shells (marginally thicker than the DOT-111 7/16 inch shells) and advanced valves that are more resilient in the event of an accident. However, these newer cars were involved in the derailments and explosions in Virginia and West Virginia within the past year, raising questions about the validity of replacing only the DOT-111s manufactured before 2011.

Before the rule was finalized, early reports indicated that the rule submitted to the White House by the Department of Transportation has proposed a two-stage phase-out of the current fleet of railcars, focusing first on the pre-2011 cars, then the current standard CPC-1232 cars. In the final rule, DOT mandated a more aggressive timeline for retrofitting the CPC-1232 cars, imposing a deadline of April 1, 2020 for non-jacketed cars.

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DataSpotlight

The recent oil production boom in the United States, while astounding, has created a misleading narrative that the United States is no longer dependent on oil imports. Reports of surging domestic production, calls for relaxation of the crude oil export ban, labels of “Saudi America,” and the recent collapse in oil prices have created a perception that the United States has more oil than it knows what to do with.

This view is misguided. While some forecasts project that the United States could become a self-sufficient oil producer within the next decade, this remains a distant prospect. According to the April 2015 Short Term Energy Outlook, total U.S. crude oil production averaged an estimated 9.3 million barrels per day in March, while total oil demand in the country is over 19 million barrels per day.

This graphic helps illustrate the regional variations in crude oil supply and demand. North America, Europe, and Asia all run significant production deficits, with the Middle East, Africa, Latin America, and Former Soviet Union are global engines of crude oil supply.